Corporate Law and Corporate Responsibility - Business Ethics (2023)

learning goals

At the end of this section you can:

• Explain how investors and owners benefit from doing business as a company
• Define the concept of shareholder primacy
• Discuss the conflict between shareholder primacy and corporate social responsibility

Company law, which allows companies to take advantage of a legal framework that separates liability from ownership and control, was introduced in most states in the 19th century. Separation of ownership and liability means that owners of modern trading companies, as opposed to individual owners and partners in partnerships, enjoy the benefit of limited liability for the company's debts and other financial obligations, a concept central to the US economy built on capitalism. economic system stands. 🇧🇷

The benefits of corporate status

The concept of limited liability means that the owners (shareholders or shareholders) of companies, as well as directors and managers, are protected by laws that state that in the event of the company's bankruptcy, their losses will, in most cases, be the amount paid for their shares would. of property ((Figure)🇧🇷 The same protections apply to owners of certain other business entities, such asLimited Liability Companies(GMBH). An LLC is similar to a corporation where the owners have limited liability; however, it is organized and managed more in a spirit of partnership. To provide owners with limited liability protection, several types of corporations are possible in each state, including a corporation, an LLC, a limited liability partnership, and a limited partnership.

Without state incorporation laws, entrepreneurs would be held personally liable for business losses, which could lead to several disadvantages. Ownership would be more risky, so owners might find it harder to sell their shares. They may also be subject to income tax on a pro rata basis. These types of personal financial responsibilities can limit a company's ability to raise capital through the sale of stock. Limited liability increases the attractiveness of investing to potential new shareholders by reducing the amount a shareholder can lose investing in a company by purchasing its shares. Ultimately, corporate status increases both the potential number of willing investors and the amount of capital they are likely to invest. After all, would you be willing to invest your money in a company knowing not only that you could lose the capital invested, but also that you could be personally sued for all of the company's debts?

Corporate status is given to a company by state laws (statutes) when a state enacts a corporate charter. The shield ofcompany statusIt allows companies to socialize their losses in ways that traditional ownership and partnerships cannot.convivialityA loss is a means of amortizing it or spreading it across society as a whole so that individual owners do not absorb it. Amortization is similar to the idea behind insurance, where many people bear a small portion of a loss instead of one or a few people bearing everything. Therefore, it is correct to say that society enables companies, both by enacting the laws that create them and by limiting the financial risk of their owners. Because our society grants for-profit corporations the right to establish and earn unlimited profits with limited liability, a reasonable person would conclude that corporations owe society a debt in return. Corporate quid pro quo - a Latin term meaningthat for– is the assumption ofcorporate social responsibility, for the benefit of the many stakeholders to which companies may have responsibilities, including customers, the community, the environment, employees, the media and government ((Figure)).

Balancing the many responsibilities of a company

An old ethical debate about corporate social responsibility asks whether a company really has a duty to society or just to its shareholders. The series of important court cases shaping this issue spans nearly a century and includes a number of landmark cases involving theFord Motor Company, Wrigley Company und Hobby Lobby.

noDodge gegen Ford Motor Company(1919) the Michigan Supreme Court ruled in favor of shareholder preference, saying that founder HenryFordFord Motor Company must operate primarily in the interest of maximizing the profits of its shareholders.

In the traditional company model, a corporation generates income and distributes the profits after deduction of costs in the form of dividends to the shareholders. Ford had announced that his company would no longer be paying large dividends to shareholders, instead using its profits to achieve a number of other goals, including improving product quality, expanding the company's facilities and, perhaps most surprisingly,... reduction in prices. Shareholders then sued Ford, asking the court to order Ford Motor Company to continue using most of its profits to pay large dividends. (It's ironic that the named shareholders suing Ford were the Dodge brothers, former Ford parts suppliers who had recently started their own car company.)

At the hearing, Ford ((Figure)) testified that he believed his company was profitable enough to reflect his broader commitment to engage in activities for the benefit of the public, including his employees and customers. This was a unique position for the founder and principal owner of a large corporation in the early 20th century. During the rise of capitalism in the United States, most owners only wanted to maximize profits because that was the primary basis of their ability to attract and reinvest capital in the company. Most investors were more interested in a healthy return on their investment than in any kind of social good. Shareholders argued that the concern Ford expressed for its employees and customers was unreasonable and illegal. The court agreed, and Ford was forced to abandon its management goal of balancing profits and pursuing broader social goals.

Ironically, in the same case, the court upheld the validity of a doctrine known as the "Rule of Business Judgment," a common law principle that states that officers, directors and managers of a corporation are not liable for losses where evidence shows that decisions were reasonable and made in good faith, giving management the freedom to decide how the company should be conducted.

In essence, the Business Judgment Rule states that a court will not challenge the decisions of a company's managers or directors.

The legality and appropriateness of social responsibility as corporate policy has come a long and stony road since 1919. For example, in the 1950s and 1960s, some state courts rejected the shareholder primacy doctrine, instead ruling that an interpretation of the broad rule of corporate judgment allowed managers discretion in allocating company assets, including social awareness programs.

In 1968, in a high-profile case, the court ruled that the board ofFirma Wrigley, famous for baseball and gumball, had significant discretion in deciding how to balance interest groups' interests.

the case ofShlensky gegen Wrigley(1968) revolved around the ownership of William Wrigley Jr. of the Chicago Cubs. The baseball team vehemently refused to install the necessary lights for night games at Wrigley Field, even though every other major league ballpark had lights. Instead, the Cubs respected the local community's belief that nighttime baseball games and the lights that came with them would negatively impact the neighborhood and create more opportunities for crime. In the eyes of some investors, however, the Cubs' decision hurt shareholders' gains. The shareholders disputed the Wrigley Company, but the Cubs' owners won the case.

The Wrigley case represented a change in the notion that companies should seek only to maximize shareholder value, as had been asserted in the Ford Motor Company case.

In the wake of that affair, lights were finally installed at Wrigley Field in 1988, but only after the owner, William Wrigley III, sold the team (1981) to the Tribune Company, a major media conglomerate that struggled with installation for six years lights. However, the case sets a precedent for management's ability to balance multiple interests and gains when making decisions.

Dodge x Ford(1919) zShlensky gegen Wrigley(1968) reasoned the dynamic nature of the shareholder primacy doctrine debate and suggested a shift in both legal thinking and precedent to give management more agency in deciding how best to run a company. A recent decisionBurwell vs. Hobby Lobby(2014) demonstrates what some consider to be the double-edged sword of this latitude.

In a 5-4 decision in favor of Hobby Lobby, the Supreme Court ruled that some companies (closely controlled by a few shareholders) may object to the Affordable Care Act, which requires health insurance to take various forms, on ethical, moral, or religious grounds of contraception cover; These companies may choose not to offer this coverage.

The majority opinion in the case was drafted by Justice Samuel Alito, along with Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas and Anthony Kennedy. In essence, the court ruled that entrepreneurs could put their personal values ​​first and pursue their own agenda. The case received a lot of publicity, some of it quite negative. In essence, the court ruled in this case that "corporate law does not require for-profit corporations to seek profit at the expense of everything else."

similar to the Chicago Cubs/Wrigley Field decision.

The decision was a victory for the family that owns Hobby Lobby, and was praised by some and criticized by others for expanding the rights of business owners. Some analysts believe that this represents more than an extension of management prerogatives and expands the right of companies to be treated as "persons". The Hobby Lobby case can be interpreted as meaning that the people who control companies (owners and/or managers) can act according to their own values ​​in a way that may not be compatible with the interests of employees and other minority shareholders. In the majority decision, Alito wrote: "An enterprise is simply a form of organization used by people to achieve desired goals. When constitutional or legal rights are extended to corporations, it is about protecting the rights of those people.”

Hobby Lobby is primarily family-owned, and Alito's comments seem to indicate that a different reading would limit the case's applicability only to privately held companies where the majority of the stock is owned by a small number of shareholders.

Some might think that Henry Ford's attempt to forego profits to pay workers higher wages was a good choice, but don't consider Hobby Lobby's preference for limiting health insurance benefits for female employees on religious grounds. However, the law must be interpreted logically: if you give management the prerogative to put a social cause before profit, shouldn't management also be able to pursue any social cause of its choosing? Extending the logic used in the Hobby Lobby case could extend the corporate rights of the personality doctrine, for example by allowing the individual's right to privacy to become a shield against regulatory scrutiny by government agencies (although a corporation is not a natural person). ).

Another potential issue with allowing more management rights to pursue social agendas is protecting the interests of minority shareholders who disagree with the majority. Because corporate law is state law, protections for minority shareholders vary widely, but owners of a small number of shares have little or no power to influence company decisions. Some states allow cumulative voting for board seats, increasing the power of minority shareholders. Others permit takeovers or dissolution statutes that apply to closely held companies. In a large traditional company, however, none of these minority ownership protections are likely to apply. Another possibility, of course, is that disgruntled shareholders sell their shares.

The two sides of the corporate responsibility debate

the question aftercorporate social responsibilityIt is the subject of high-level global discussions and debates between leaders in the public and private sectors, such as: B. the annual meeting of the World Economic Forum in Davos, Switzerland. Several reputable academic centers also host forums on CSR, such as Stanford University's Center for Democracy, Development and the Rule of Law and Harvard Law School's Forum on Corporate Governance and Financial Regulation.

As we have seen, the slow but steady acceptance of CSR as a legitimate business concept has led to the legal and ethical position that business leaders and managers can exercise business judgment and discretion in running a business. There are several reasons for this development: a) the fact that society allows LLCs to exist, b) the extent of economic power that corporations wield, and c) the desire of corporations to act responsibly to avoid broader government regulation. Managers are generally granted a great deal of freedom as long as they can refer to a rational interpretation of their actions in terms of the long-term benefit of the company as a whole. The combination of economic and political power in the world's largest companies requires leaders to consider the interests of a broader group of stakeholders, not just shareholders. In fact, social, environmental and charitable programs often create shareholder value rather than detract from it. And fulfilling commitments to all of a company's stakeholders—including those who do not own stock—is the moral minimum a company must adopt in order to meet the basic threshold of ethical conduct.

A recent study by researchers at Princeton and the University of Texas shows that companies benefit in several ways from complying with CSR guidelines.

These benefits are collectively referred to as the “halo effect” and can add value to the business. For example, consumers often see CSR spending as an indirect indicator that a company's products are of high quality, and they are also often more willing to buy those products as an indirect way to donate to a good cause.

However, some economists such as Milton Friedman, Henry Hazlitt, Adam Smith and others have argued that CSR initiatives are more based on environmental or social justiceBordershareholder wealth.

Economics Nobel Laureate MiltonFriedmann(1912–2006) believed that shareholders should be able to decide for themselves which social initiatives to donate to or participate in, rather than having an executive decide for them. He argued that both government regulations and corporate social initiatives allow an outside third party to make these decisions for shareholders.

In Friedman's view, too much power seized by corporate leadership to pursue a social agenda can lead to a form of corporate autocracy. Proponents of the profit maximization principle believe that reducing air pollution below legal levels, requiring suppliers to participate in a sustainable supply chain initiative, or paying lower-level employees salaries above legal requirements is a waste of corporate resources . Minimum wage. Friedman asserted that "doing good deeds" is not the job of corporations; It is a right of those who want to do it, but it should not be imposed on those who don't want to. His philosophy is that socially oriented initiatives correspond to a form of external regulation, resulting in higher costs for companies pursuing socially responsible policies.

When Friedman articulated this position in the 1970s, it reflected the prevailing view of corporate law held by most American stockholders and commentators at the time. In the years since, however, Friedman's perspective has fallen out of favor. This doesn't invalidate his point, but shows that public opinion about companies changes over time. The subjectivity or relativity with which we view corporations, along with their perceived rights and obligations, is an important issue addressed in this text.

Do company directors have a special fiduciary duty to shareholders? A fiduciary duty is a very high level of legal responsibility for those who are managing someone else's money, including duties of care and loyalty. Some examples of relationships involving fiduciary duty are those between an estate trustee and its beneficiary, and between a fund manager and a client. According to the American Bar Association, the Rule of Business Judgment states that “corporate directors, as trustees, owe the company and its stockholders a fiduciary duty of care and fidelity in the discharge of their corporate duties. These duties of care include duty of care and duty of loyalty. 🇧🇷 🇧🇷 duty of care is the obligation to act in an informed manner; The duty of loyalty requires that the board and its directors act in good faith and put the best interests of the company and its shareholders ahead of the interests of any other person."

So the answer seems to be yes, corporate directors have a specific fiduciary duty to promote the best interests of the company. But what exactly does this obligation entail? Specifically, does this mean returning profits to shareholders in the form of dividends? As we have seen, these problems often spill over into the courts in the form of shareholder actions challenging the actions of directors and/or management.

The duty of loyalty also includes the duty of notification, as can be readoften quotedMeinhard against salmonFallof 1928 in which the New York Circuit Court of Appeals held that business partners may owe one another a fiduciary duty with respect to business opportunities that arise in the course of the partnership.

UCLA law professor Steven Bainbridge wrote in theNew York Times: "If directors could deviate from maximizing shareholder wealth, they would inevitably turn to indeterminate patterns of equilibrium that offered no accountability."

In support of his position, Bainbridge pointed to a 2010 caseeBay Domestic Holdings Inc. gegen Newmark, in which a Delaware court ruled that company directors are bound by fiduciary duties and standards that include "acting to increase the value of the company for the benefit of its shareholders."

However, Lynn Stout, a professor at Cornell University Law School, wrote a contrasting article inNew York TimesIn it she said: “There is a general belief that corporate leaders have a legal obligation to maximize corporate profits and shareholder value – whether that means circumventing ethical rules, harming the environment or harming employees. But this belief is completely wrong. Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.”

Your opinion is based in part on the Hobby Lobby decision mentioned above.

So while ethicists may agree that corporations owe social responsibility to society, legal scholars still disagree on this point. The fact that we have seen conflicting court decisions over the last century confirms the lack of legal consensus. Of course, both legal and ethical opinions are in constant flux, so the state of the debate today is far from indicative of where it will be ten years from now. On this issue, public opinion, as well as that of politicians and even the courts, is like a pendulum, swinging back and forth, usually between centre-right or centre-left views rather than between extremes. However, the pendulum resets from time to time, and the arc in which it swings may differ from season to season.

It is clear that many different stakeholders value corporate social responsibility, including some investors, shareholders, employees, customers and suppliers. In fact, some companies see CSR as a perfect long-term strategic opportunity to strengthen the company's fundamentals while making a contribution to society. Effective business leaders will seek to attract investors to the idea of ​​CSR by avoiding or minimizing the potential for litigation related to profit maximization. And innovative companies find ways to create added value for the economy and society at the same time.

Data analysis shows that following a corporate social responsibility policy does not necessarily mean losing money; On the contrary, many companies that take an ethical approach to doing business are actually quite profitable. Mutual funds, recognizing that investors care about sustainable investing, are now offering socially responsible funds and third-party rating companies, such as Morningstar Rating Funds, so potential investors can assess how well the companies they contain are performing in terms of environmental, social and governance meet challenges. An example of this type of fund is the Calvert Fund, which describes itself as “a leader in responsible investing with a mission to deliver superior long-term performance to our clients and enable them to make a positive impact”.

To beWebsite da Ellevesttakes you to a digital investment platform by women for clients. The idea was developed in 2016 by Sallie Krawcheck, who has worked for large Wall Street companies and has seen firsthand the challenges of taking an ethical approach to investing in traditional businesses, particularly for women.

The chart below looks at mutual funds and their returns over different time periods; Included are examples of general index funds and "socially responsible" vssocial index funds((Figure)🇧🇷 If we compare the twogeneral index fundsAt the top of the bottom three funds investing in socially responsible companies, we see a competitive return on investment in social funds. Social responsibility does not mean lower profitability.

Being socially responsible doesn't necessarily mean not being profitable. ThisVideo interview with George Pohleshows how ensuring that CSR is at the heart of a company's strategy can generate financial benefits. Pohle is Vice President and Global Leader of the Business Strategy Consulting Division at IBM Global Business Services.

summary

While some argue that companies have a primary duty to maximize profits for the benefit of shareholders, others argue that companies have a duty to the society in which they operate, a duty that underpins the CSR philosophy. Many court cases have dealt with the issue, but it has not been conclusively resolved.

Despite the ongoing ethical debate, being a good corporate citizen is a goal that most modern businesses aspire to. An effective CSR policy generally means that companies must commit to an internal and external ethical approach. Corporate social responsibility and good corporate governance are really just two sides of the same coin. Social responsibility does not mean lower profitability.

evaluation questions

Closing remarks

2Dodge versus the United States. Ford Motor Company, 204 Mich. apartment 459, 170 NW 668 (March 1919).

3Dodge versus the United States. Ford Motor Company, 204 Mich. apartment 459, 170 NW 668 (March 1919).

4Dodge versus the United States. Ford Motor Company, 204 Mich. apartment 459, 170 NW 668 (March 1919).

5Shlensky vs. Wrigley, 237 N.E. 2d 776 (Fig. App. 1968).

6Shlensky vs. Wrigley, 237 N.E. 2d 776 (Fig. App. 1968).

7Burwell v. Hobby Lobby, 573 U.S. ________ (2014).

8Burwell v. Hobby Lobby, 573 U.S. ________ (2014).

9Burwell v. Hobby Lobby, 573 U.S. ________ (2014).

10"Corporate Social Responsibility: The Halo Effect",The economist, 25. June 2015. https://www.economist.com/news/business/21656218-do-gooding-policies-help-firms-when-they-get-prosecuted-halo-effect.

11Milton Friedmann,capitalism and freedom. (Chicago: University of Chicago Press. 1963).

14Stephen Bainbridge, „A Duty to Shareholder Value“, Meinungsseiten,New York Times, 16. April 2015. https://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/a-duty-to-shareholder-value.

fifteenLynn Stout, "Companies Don't Need to Maximize Lucros", Opinion Pages,New York Times, 16. April 2015. https://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/corporations-dont-have-to-maximize-profits.

16Rick Wartzman, "What Peter Drucker Knew About 2020"Harvard Business Review, 16. October 2014. https://hbr.org/2014/10/what-peter-drucker-knew-about-2020.

17Unilever. https://www.unilever.com/sustainable-living/values-and-values/.

18Tracey Keys, et al., „Making the most of Corporate Social Responsibility“,McKenzie quarterly, December 2009. https://www.mckinsey.com/global-themes/leadership/making-the-most-of-corporate-social-responsibility.

19Kalvert. https://www.calvert.com/.

glossary

Business Judgement Rule

the principle that officers, directors and managers of a company shall not be liable for losses where evidence shows that decisions were made reasonably and in good faith

duty of loyalty

a very high degree of legal responsibility for someone managing someone else's money, including duties of care and loyalty

limited liability

Protection of a business owner against loss of personal property granted with business status

moral minimum

the minimum actions or practices that a company must undertake in order to meet the minimum threshold for ethical conduct

something for something

the exchange one makes to obtain something of value; from the Latin meaningthat for

shareholder primacy

Duty of a corporation to maximize profits for shareholders